Economic Systems

An economy or economic system an organized way of providing for the wants and needs of their people.

Traditional Economies In a traditional economy roles are defined by the customs of their elders and ancestors. Allocation of resources, and nearly all other economic activity, stems from ritual, habit, or custom. Individuals are not free to make decisions based on what they want or would like to have.

Examples Central African Mbuti Australian Aborigines North Canadian Inuits

Advantages Everyone knows what role to play and there is little uncertainty about WHAT, HOW, and FOR WHOM to produce.

Disadvantages Discouragement of new ideas and new ways of thinking…this leads to a lower standard of living than in other societies. Strict roles in a traditional society have the effect of punishing people who act differently or break rules.

Command Economies A central authority determines WHAT, HOW, and FOR WHOM to produce. Economic decisions are made by the government: the people have little, if any influence over how the basic economic questions are answered.

Examples North Korea Cuba former Soviet Union People’s Republic of China

Advantages The ability to dramatically change direction in a relatively short period of time. Little uncertainty for its citizens.

Disadvantages Consumer needs may not be met. Hard work is not rewarded Necessary decision-making bureaucracy delays decisions. Little flexibility to deal with day-to-day problems. Individual initiative goes unrewarded.

Market Economies People and firms act in their own interests to answer the three economic questions (WHO, HOW, and FOR WHOM). A market is an arrangement that allows buyers and seller to come together in order to exchange goods and services.

Examples United States Canada Japan South Korea Singapore Germany France Great Britain

Advantages Can adjust to change High degree of individual freedom Relatively small degree of government interference Decision-making is decentralized, or not concentrated in the hands of a few

Incredible variety of goods and services available to consumers High degree of consumers satisfaction

Disadvantages Does not provide for the basic needs of everyone in the society- some members of the society may be too young, too old, or too sick to care for themselves. Does not provide enough of the services that people value highly…defense, education, or health care.

Relatively high degree of uncertainty that workers and businesses face as the result of change and competition. Must guard against market failures.